Paul Taylor, a contributing editor at POLITICO, writes the “Europe At Large” column.
PARIS — Like an ill-disciplined football team, the EU often goes a few goals down at the start of a crisis only to snatch victory in the second half once it starts to play like a team.
The COVID-19 pandemic, which respects no national frontiers, is the epitome of a common threat to all 27 member countries that cries out for a collective response. Yet the initial impact has been to tear holes in Europe’s free movement of people, goods and services while leaving the hardest-hit countries feeling abandoned and EU institutions looking like bystanders.
National leaders seeking to protect their citizens ordered unilateral border closures and export bans on medical equipment and protective clothing that have upended — at least temporarily — the Schengen area of passport-free travel and the single market. Some countries imposed total lockdowns while others left their citizens relatively free to roam.
“Economically we are one, but politics has remained national,” former Eurogroup Secretary Thomas Wieser noted in an interview with Dutch daily NRC Handelsblad.
There is no single silver bullet. But like HIV patients, EU economies may best be treated with a cocktail of three or more medicines.
The first half has not been a triumph for European unity or efficiency, but we haven’t yet even reached halftime.
Here are some ideas — based on conversations with some of the eminent figures who led the EU response to past crises — for how collective EU action can help provide an exit strategy from what is set to be the biggest economic collapse since the Great Depression of the 1930s.
Financing the recovery
After a false start, the European Central Bank has stepped up and taken sweeping emergency action to underpin the eurozone and forestall a bond market meltdown. That bought precious time for political action by governments, but the ECB cannot bear the burden alone indefinitely. And national spending measures will not be sufficient for the hardest-hit countries with the least financial firepower.
While much of the debate about how Europe should respond in solidarity has centered on issuing “corona bonds” collectively underwritten by eurozone members, this legitimate aspiration is neither a quick fix nor the most urgently needed measure.
Even if deep German and Dutch political resistance could be overcome, it would require time-consuming EU legislation and possibly a separate intergovernmental treaty, and it would inevitably be challenged in the courts, creating legal uncertainty for investors.
There is no single silver bullet. But like HIV patients, EU economies may best be treated with a cocktail of three or more medicines.
Funds can be mobilized right now from the European Stability Mechanism — the eurozone’s intergovernmental bailout fund — with minimal conditions limiting the use of the low-interest loans to strengthen health care and combat COVID-19. The ESM will have to forego the humiliating, intrusive supervision of national treasuries imposed in the eurozone debt crisis.
Italian politicians have so demonized the ESM that it seems unlikely Rome will request a loan. This is foolish, since a country that took a credit line from the bailout fund would be eligible to have its sovereign bonds bought by the ECB in unlimited quantities under the never-used Outright Monetary Transactions program. That would give Italy and Spain the extra safety net they will need to borrow on financial markets at a time when fiscal revenues are collapsing and public spending needs exploding.
If the ESM ran out of money, experience shows eurozone governments would top it up. By then, additional collective financial instruments should be in place such as the European Commission’s €100 billion unemployment reinsurance scheme and European Investment Bank lending to help tide small and medium-sized businesses over in their cash flow crisis.
Beyond that first response, the EU needs a substantial recovery fund that can use the bloc’s collective borrowing power to invest in the post-coronavirus economy. That must be a central focus of next week’s European Council summit by videoconference.
Several EU countries are bound to face problems of debt sustainability after the crisis. Italy’s public debt is already at 135 percent of gross domestic product, Spain’s is over 95 percent and France’s set to top 100 percent this year. In the long run, a sensible solution will require a combination of mutualizing new borrowing and restructuring legacy debt.
Italian Prime Minister Giuseppe Conte | Chigi Palace handout/EPA
As Italian Prime Minister Giuseppe Conte has reminded Berlin, creditor nations wrote off half of West Germany’s pre-war debt burden in 1953 and stretched the other half over 30 years, creating the conditions for its “economic miracle.”
A common financial response is in the self-interest of Europe’s northern creditor nations. The Germans will need to export their cars and machinery to economically healthy European partners after the crisis, and the Dutch depend on open borders and solvent European economies to sell their tulips and tomatoes and ensure Rotterdam’s prosperity as the EU’s biggest trade gateway.
The easiest way to handle the debt problem may well be to replicate the Greek “exception” following Athens’ debt crisis and stretch loans out over decades, with a moratorium on interest payments until economies have recovered to pre-crisis levels. Those who scream about “moral hazard” — the risk of rewarding bad behavior — should remember that COVID-19 is a common no-fault crisis.
As former Italian Prime Minister and European Commissioner Mario Monti put it: “This is not about ‘la dolce vita’ (the sweet life), it’s about ‘la vita’ — about life itself.”
Unwinding the emergency
The longer the crisis lasts, the more Europe will emerge with a shattered “war economy.” Governments across the EU will have stepped in both as employer of last resort, to preserve millions of jobs and support those thrown out of work, and to rescue companies from insolvency with credit lines and in some cases by nationalization or taking equity stakes.
Only a fully empowered, impartial European Commission can avoid a disorderly exit from this economic emergency that could otherwise distort or destroy the single market. Brussels did this successfully with the “Davignon Plan” that restructured and shrank the European steel industry after the 1970s energy crisis, ending a ruinous subsidy race.
An obvious example now is airlines, which face imminent collapse having been forced to halt most or all flights for weeks and potentially months. But auto manufacturers and the tourism sector also face huge survival challenges.
In the first instance, the Commission has responded to huge pressure from governments by suspending EU rules on budget discipline and state aid to business, green-lighting national aid to companies. But new rules of the road will be needed to prevent a beggar-thy-neighbor aftermath.
“Back in my steel days, there was the same evolution,” recalled Etienne Davignon, who was European commissioner for industrial affairs from 1977 to 1985. “Governments started by telling the Commission ‘hands off,’ but soon they were saying ‘tell us what to do.’”
“Today, I don’t see any state that believes they can support their companies,” he added. “In the steel industry, governments simply ran out of money to pay.”
Davignon, 87, is still active as a senior adviser to gas utility Engie and chairman of Brussels Airlines, which he co-founded out of the wreckage of Belgian national carrier Sabena when it went bust in 2001.
Without joint European action, the risk is that large and rich member countries bail out their own airlines or carmakers, while poor and small countries struggle, leading to massive distortions of competition within the EU and internationally.
Can the European Commission arbitrate in the division between Northern and Southern European countries? | Aris Oikonomou/AFP via Getty Images
Governments may well try to ring-fence state aid to companies by insisting that it be spent at home, or shareholders may prevent the money being used abroad. So, Lufthansa might be barred from sharing German public loans with its Austrian, Belgian or Swiss subsidiaries. Or Air France-KLM might be barred from using French rescue cash in the Netherlands. Such restrictions could easily trigger a subsidy war, protectionist retaliation, or both.
The coronavirus crisis may also unleash a fire sale of fundamentally sound companies distressed due to the sudden economic shock. Unless Brussels is vigilant, it may also permit the state-backed survival of firms that were not commercially viable before the virus struck, such as Italian flag carrier Alitalia, but which governments will not dare let collapse for fear of the social and political fallout.
While the EU’s historic role has been to maintain a level playing field and common rules so that market forces can produce efficient economic outcomes, the post-crisis world will require a more directive role in the economy. This doesn’t mean reviving Gosplan, the Soviet-era central planning agency, but it should involve a leading role for the Commission in reducing overcapacity and overseeing an orderly exit from the crisis.
Supporting poorer partners
The closure of the Schengen zone’s external borders and the focus on national lockdowns and emergency measures may have been an understandable reflex in the first phase of the crisis, but they have amplified a “fortress Europe” mentality that was gaining ground in an alarming way before the virus started to spread.
The Commission is right to counter the temptation for inwardly focused Europeans to neglect the rest of the world, as the United States has done under President Donald Trump.
Helping our neighbors is helping ourselves. That begins in the western Balkans and in Turkey, where the EU must renew its financial assistance for more than 3.5 million Syrian refugees. Poorer nations, especially those in Africa, will need massive financial support, investment and debt relief to cope with COVID-19.
This is a geopolitical and humanitarian field in which the EU can and must lead.
Coordinating future crisis responses
The other area where the EU can add value after the crisis is by giving the Commission a far greater role in coordinating and organizing the response to cross-border civil emergencies, including pandemics, obviously, but also natural disasters. This starts with coordinating the gradual lifting of confinement measures to share best practices and avoid friction at Europe’s internal borders.
The steps Brussels has taken in the last month to use the EU’s collective purchasing power to bulk-order face masks, protective gear, ventilators and essential medical supplies should be turned into a permanent role in ensuring stockpiles of emergency supplies, just as the EU requires member countries to keep oil reserves to last at least three months. It may make economic sense to share a central stockpile rather than for each member country to keep its own.
When historic challenges arose in the past, the Commission often had proposals in the pipeline — sometimes stalled by disagreements among member countries — that it could dust off and promote as a “European solution.”
These often allowed the EU to recover from an early setback to emerge stronger in the end.
After a very rocky start, there are signs the EU is getting its act together to respond collectively to COVID-19.
After the Berlin Wall fell in 1989, ushering the end of communist rule across Central and Eastern Europe, the initial reaction of Western European leaders was disorderly and threatened to divide the then 12-nation European Community. British Prime Minister Margaret Thatcher summoned advisers to discuss how to prevent German reunification. French President François Mitterrand rushed to Kyiv and to East Berlin to try to shore up communist reformers.
Commission President Jacques Delors brought forward existing proposals for a single currency as the common response to anchor a reunited Germany in an ever-closer European Union.
Likewise, when the September 11 terrorist attacks struck the U.S., the Commission pulled out stalled plans for a European arrest warrant to replace lengthy and inefficient extradition procedures among EU countries as the “European answer” to fight terrorism.
This time, blueprints in the Commission’s filing cabinets are proving useful once gain. Proposals for an unemployment reinsurance scheme and for some form of collective borrowing have been idle for years. These can now serve as the start of a game plan as the EU starts to look for a way out of the crisis.
After a very rocky start, there are signs the EU is getting its act together to respond collectively to COVID-19. If history is a guide, Europe has both the need and the ability to win the match — but only if countries realize they’re playing for the same team.
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